Are CFOs really embedding ESG within their strategies?

As the corporate world grapples with heightened environmental, social, and governance (ESG) pressures, a new report from BDO reveals a remarkable shift in the role of CFO.

The 2024 ESG Risk & ROI Survey showcases how finance leaders are no longer mere spectators, but rather strategic orchestrators guiding their organisations towards a more sustainable future.

The report says more than half (53%) of surveyed CFOs now claim to have embedded ESG principles into their core business strategy or are actively working towards it. This marks a significant increase from the previous year, where only one-third of finance chiefs were considered “ESG-mature.”

“As businesses progress in their ESG journey, the distinction between sustainability efforts and business strategy blurs,” the BDO report observes. “Sustainable practices become not just ancillary but central to driving business success and resilience.”

Shifting Priorities: From Compliance to Value Creation

Accompanying this surge in ESG maturity is a notable shift in CFOs’ priorities. Whereas compliance once topped the list of ESG goals, it now ranks a mere eighth in importance. Finance leaders are increasingly recognising the myriad ways in which sustainability initiatives can create tangible business value and competitive advantage.

The top objectives now include improving brand reputation, attracting and retaining talent, and enhancing employee engagement – all of which can contribute to long-term organisational resilience and growth. This strategic realignment reflects a deeper understanding that ESG is not merely a regulatory obligation, but a powerful lever for driving sustainable value.

Harnessing the Talent Advantage: ESG as a Talent Magnet

A key finding from the BDO survey is the pivotal role of human capital in shaping ESG strategies. Amid the ongoing war for talent, attracting and retaining skilled employees has emerged as a top priority for CFOs, ranking second only to improving brand reputation.

“Many modern workers want their employers to take responsibility for their impact on society and the environment,” explains Steve Matson, leader of BDO’s human capital consulting practice. “To win and keep such talent, organisations should demonstrate genuine commitment to sustainable practices.”

This sentiment is particularly pronounced in the healthcare sector, where CFOs are most focused on leveraging ESG initiatives to attract and retain talent – a critical imperative given the prolonged worker shortages plaguing the industry.

Bracing for Intensifying ESG Risks

As businesses deepen their sustainability commitments, they must also contend with a rapidly evolving risk landscape. The BDO survey reveals that 61% of CFOs anticipate ESG risks will pose the same or greater business threat in 2024 compared to the previous year.

This heightened risk perception is especially pronounced among ESG-mature organisations, with 41% of their finance chiefs viewing ESG issues as a greater risk, compared to just 31% of their ESG-reactive counterparts.

The report suggests that companies with a more advanced sustainability mindset are better equipped to identify and monitor these complex, often hidden risks.

“Many climate, human capital, and regulatory risks are not obvious,” the report cautions. “If proactive ESG risk assessment isn’t baked into broader enterprise risk management, these risks may be missed until the consequences are felt.”

Navigating the Generative AI Minefield

As if the ESG landscape wasn’t complex enough, the survey also delves into the emerging risks and opportunities presented by generative artificial intelligence (AI). CFOs are simultaneously excited and apprehensive about the technology, with more than half (52%) citing either social or governance risks as their top concerns.

The potential for generating and acting upon incorrect information, data privacy challenges, and ethical quandaries around AI bias rank among the most pressing issues. To mitigate these risks, nearly half (49%) of finance leaders have formalised or are in the process of formalising policies for generative AI use.

“While AI presents some risks, it also serves as a powerful risk mitigation tool,” the report notes. CFOs see compliance and reporting applications as the primary near-term opportunities, as generative AI could significantly ease the administrative burdens of sustainability data collection, quality control, and disclosure.

The CFO’s Evolving Role in Sustainability

The BDO survey underscores the growing prominence of the CFO in driving sustainability and ESG strategies. Three-quarters of respondents expect their involvement in strategic ESG conversations to stay the same or increase in the coming year, with just 3% reporting no involvement at all.

“Even as more companies appoint designated sustainability leaders, finance leaders are more vital than ever to their organisation’s sustainability and ESG efforts,” the report states.

“With a broader strategic perspective, CFOs often serve as a catalyst connecting – and balancing – new growth opportunities and risk-driven imperatives across a wider set of stakeholders.”

By embedding ESG and sustainability initiatives into the overarching strategic agenda, CFOs can help retain top talent, better manage risk, and drive long-term resilience – all while ensuring compliance with the intensifying regulatory environment.

Unlocking the Power of Sustainable Financing

As businesses seek to fund their sustainability initiatives, the BDO survey highlights a potential missed opportunity – tax credits. While access to sustainable financing ranks fourth among CFOs’ ESG goals, just 34% of respondents say they plan to claim tax credits this year.

“The renewable energy tax credits and transferability provisions introduced by the Inflation Reduction Act empower organisations to capitalize on the enormous upside of the energy transition,” explains Gabe Rubio, tax principal at BDO. “There are also a myriad of other state and local incentives that companies may be overlooking.”

By proactively exploring and claiming available tax credits, finance leaders can not only offset their sustainability investments but also bolster their bottom line – a win-win for both the business and the environment.

Recommendations for CFOs

The BDO report offers several key recommendations for CFOs navigating the evolving ESG landscape:

1. Evaluate your opportunities: Link ESG priorities to opportunities that create differentiation, efficiency, and growth across the organisation.
2. Stay focused on what’s most material: Ensure that sustainability strategies reflect the unique needs and mission of your business and stakeholders.
3. Create shared ownership: Bring the finance function together with other core departments to develop a unified strategy and measurable goals.
4. Actively participate in ESG conversations: Remain involved in ESG investment discussions and proactively identify synergies with the broader business strategy and enterprise risk management.
5. Evaluate notification mechanisms: Assess existing communication and feedback channels to ensure the finance department is kept apprised of ESG-related updates.
6. Turn ESG initiatives into tangible cost savings: Explore available tax credits and incentives to offset your organisation’s sustainability investments.
7. Don’t wait to prepare for ESG disclosure mandates: Work with other functions to identify and address all climate, human capital, and generative AI risks, and verify that public disclosures communicate them consistently.
8. Increase the frequency of ESG risk identification exercises: Regularly evaluate the quality of your existing risk and incident identification controls and technologies.
9. Create enforcement processes: Develop robust risk monitoring and enforcement mechanisms to ensure that financially material risks are addressed and can be disclosed when required.

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